Federal Reserve Governor Christopher Waller, an influential voice in policymaking who until recently had advocated for lower interest rates, on Friday said the Fed should axe the "easing bias" from its policy statement and effectively open the door to a possible rate hike.
Waller said he wasn't advocating for a hike at this point, but felt that at the very least the Fed needs to keep the current policy rate in place until it is clear inflation, which he worries is broadening and becoming more persistent, shows signs of returning to the Fed's 2% target.
At an economic forum in Germany he had sharp words for anyone still contemplating lower borrowing costs.
“It’s just kind of crazy to say you could start talking about rate cuts in the near future" with inflation stuck above target and the job market seeming more stable than it did earlier in the year, Waller said. "You just can't look at this data and say yeah we could cut rates by September or something…you can’t be serious as a central banker and talk like that.”
His comments amplify the dilemma faced by incoming Fed Chair Kevin Warsh, who was due to be sworn in just an hour after the comments by Waller, who was also a candidate to succeed outgoing Fed Chair Jerome Powell, were posted on the Fed's website. President Donald Trump, who appointed Warsh, has argued in favor of drastically lower interest rates, frequently chastising outgoing chair Powell for not acceding to his demands.
With the Fed's preferred measure of inflation hitting 3.8% in April and broadening across goods and services, Waller said he would "support removing the 'easing bias' language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase."
COMMENTS SHIFT MARKET BETS
His comments quickly shifted bets in the direction of a Fed rate hike. Pricing in contracts based around the central bank's policy rate on Friday reflected about a two-in-three chance of a quarter-point interest-rate increase by the Fed's October meeting, and nearly even odds on a hike at the prior September meeting.
Before Waller's remarks, traders were betting on an initial rate hike by December.
"The next move, whether it is a hike or cut, will depend on the data. Removing the language about the extent and timing of additional adjustments would make this point clear," Waller said, a move he is prepared to make both because of high inflation and of emerging stability in a labor market that had driven his recent outlook for further rate cuts.
"I don’t see the prospect of a weakening labor market as the dominant force that should be guiding monetary policy in the months ahead," Waller said.
Far from overseeing rate cuts, as many analysts felt Warsh would be doing until recently, he may now face strong support from among his colleagues at the June 16-17 meeting to push his first policy statement as chair in a hawkish direction. Three Fed officials dissented at the April meeting in favor of making the change then.
The Fed held interest rates steady at its last meeting and is expected to do so again when policymakers gather on June 16-17 for the first time under the new Fed chair.
Minutes of the April meeting showed a growing number of officials saying that rate hikes may be needed to counter inflation that seemed to be spreading beyond the narrow channels of high oil prices or the influence of import taxes imposed by Trump.
Waller said that on deciding the next steps for interest rates he will watch in particular inflation expectations in the two- to four-year horizon, and that any increase there would be "alarming."
He said more inflation risks the Fed "getting behind the curve again," similar to the 2021-2022 period, when inflation surged to a 40-year high.
